Marissa Mayer Decides Yahoo's Turnaround Needs a Turnaround

Legacy Banner, Desktop Ad Businesses Remain Portal's Breadwinners

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Yahoo CEO Marissa Mayer and CFO Ken Goldman
Yahoo CEO Marissa Mayer and CFO Ken Goldman Credit: Marissa Mayer's Tumblr page

Maybe Yahoo goes ahead with its plan to spin off its core advertising business into its own company. Maybe it opts to sell it to another company instead, a possibility the portal's executives appear to have finally put on the table. Either possibility might happen before the company's turnaround, which is three-and-a-half years in the making since Marissa Mayer became CEO in July 2012.

On Tuesday, Yahoo reported its fourth-quarter earnings, which showed a stagnant business that's become less and less profitable. Consider how Yahoo's total revenue as well as its revenues from display advertising and search advertising appear to have grown, if only slightly, since Ms. Mayer took over.

Those revenue figures don't take into account traffic acquisition costs, like the money that Yahoo pays to Mozilla to make Yahoo the default search engine in the Firefox web browser or the revenue it shares with the third-party sites and apps that run Yahoo-sold ads. It appears that Yahoo's deal with Mozilla and its acquisitions of mobile ad network Flurry and video ad exchange BrightRoll have brought more money Yahoo's way, but without Yahoo being able to hold on to as much of that money.

In the past year Yahoo's traffic acquisition costs have ballooned by 266% year-over-year to hit $271 million in the fourth quarter. Taking into account those increasing traffic acquisition costs casts a less favorable light on Yahoo's revenues and hampers its profits.

Yahoo execs continue to claim that they are shedding Yahoo's old business, which is serving as a shell for the new business it's building. Instead of traditional banner ads served on desktop sites, Yahoo wants to orient its business around search, video and so-called native ads served on mobile sites and apps. That's why it rolled out its Stream Ads in 2013 that appear within its article feeds and look like an editorial article entry, and why it combined those ads with its mobile search ads to sell programmatically through its Gemini ad marketplace. It's also why it signed the search deal with Mozilla; redesigned its search results pages and home page (twice); acquired Flurry, BrightRoll and Tumblr; produced its first original video series; overhauled its email service; and introduced a number of digital magazines.

Yahoo is reversing some of those moves as part of its latest turnaround plan, which Ms. Mayer outlined on Tuesday. She reiterated that Yahoo has pulled back on its original video programming following the shutdown of its video service Yahoo Screen and announced that Yahoo would be shutting down some of its digital magazines, but did not specify how many or which ones.

"In a turnaround you must literally turn around declining revenue," Ms. Mayer said during Yahoo's earnings call on Tuesday afternoon. Instead of turning around Yahoo's existing businesses -- such as its desktop display ad business -- the company decided it needed to create new businesses to turn around its overall business, she added, describing the process as a "tectonic shift." And that figurative shift appears to take as long as the literal one.

According to figures from ComScore, U.S. traffic to some of Yahoo's most important sites, like its home page, search engine and email service, has stayed pretty stagnant since February 2013, seven months after Ms. Mayer took the reins. As of December 2015, Yahoo's home page traffic had declined by 13% year-over-year, and its mail traffic was down by 8%, though its search traffic was up 11%, likely thanks to its search deal with Mozilla that was announced in November 2014.

Yahoo's digital magazines have been among the company's biggest bets to grow its audience and lure brand advertisers. However that bet doesn't appear to have paid off. Digital measurement firm Jumpshot looked at U.S. traffic to 12 of Yahoo's digital magazines between July 2015 and December 2015. In that span monthly audience numbers declined for all but three of the digital magazines.

Ms. Mayer had said back in 2012 that it would take three to five years. It appears to be time to reset the clock.

Yahoo claims that it's rebuilding strategy is working. Its so-called MaVeNS revenue -- the money it makes from mobile, video, native and search ads -- increased by 26% year-over-year to reach $472 million in the fourth quarter. Meanwhile Yahoo's fourth-quarter mobile revenue grew by 15% year-over-year to hit $291 million. But both businesses are minor contributors to Yahoo's $1.2 billion in overall traffic-driven revenue. In the fourth quarter, MaVeNS accounted for 39% of that revenue, and mobile accounted for 24% of that revenue. Additionally Tumblr -- one of three pillars along with search and email to Yahoo's new turnaround strategy -- failed to reach the $100 million revenue goal in 2015 that Yahoo execs had laid out in 2014, Yahoo Chief Financial Officer Ken Goldman said during the company's earnings call.

There do appear to be a couple bright spots in Yahoo's fourth-quarter earnings report. The company was able to get people to sell more display ads than it did a year ago and was able to get advertisers to pay more, on average, for each display and search ad compared to a year ago.

That price-volume trend likely helped Yahoo's display advertising revenue, excluding traffic acquisition costs, to increase year-over-year for the third straight quarter. But Ms. Mayer said that Yahoo is still having trouble getting brands to buy its pricier, so-called "premium" ad formats that Yahoo had historically sold directly. Instead of buying those ads directly, advertisers are picking them up programmatically, which often makes them cheaper because they can be targeted at a smaller, more specific audience, and Ms. Mayer said she expects prices to pick up as more of those formats are bought programmatically. That premium ad money is also making its way to Yahoo's MaVeNS formats, she said.

However Yahoo's ballooning traffic acquisition costs appear to have kneecapped the growth of its search advertising business. Ms. Mayer attributed the search pricing struggles to mobile, where people may be less likely to click on a search ad and buy something from the advertiser to justify the advertiser's spend. She later said that Yahoo's mobile search ad business has "reached some point of maturity" and expects to see "some slowing of growth there."

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